2008 Financial Terrorism – Conspiracy or part of The Perfect Storm? (Phases 1 and 2)

In Sept, 2008, I penned the post, the US Economy: A Perfect Storm of Housing and Lending Events. This overview of how we managed to bring ourselves to the precarious cliff of a failed economy revealed it was not a single issue, but a combination of many events – including political pressure on lenders for homeownership, relaxing of GSE lending criteria, regulation/deregulation, and profit motivation by financial institutions – leading to an out of whack supply vs demand, driving up housing values to unsustainable and dangerous levels.

Since that time, I’ve tried to dissect what many here, and elsewhere, have dismissed as a report they consider simply a distraction from ill thought US fiscal policies and irresponsibility by both Congress and Wall Street alike, and fueled to a frenzy by irresponsible homeowners.

Be assured that the Freeman report does not dismiss irresponsibility for US fiscal policies and events. Rather, he frames his three Phrase hypothesis upon the premise that our self-induced fragile and unsustainable fiscal trajectory, combined with opaque global trading practices, was easily exploited for purposes of financial terrorism. And several out of the norm trading activities – such as an oil spike that wouldn’t traditionally happen, the bear runs at US financial institutions, and the disappearance of a hefty amount of money in the markets in a short time – were enough to raise suspicion.

It can be said that most conspiracy theories contain variations and glimmers of truth. So, to be as analytical as I can, without slinging political arrows, I offer you my thoughts on the first two of three Phases of the Freeman theory of Financial Terrorism as an element in the global 2008 economic crash.

Phase 1 – Oil as a Weapon

Under normal conditions, an economic actor would seek to maximize returns and would therefore slow any price rise to reduce suspicion and minimize negative impacts on demand. A desire to spike prices may imply other intentions more in line with the oil as a weapon theory.

To summarize, the end goal of Phase 1 was simple… to generate enough excess wealth to launch Phase 2; bear raids on the markets. This starts with the assumption that the spike in oil prices in late 2007 and 2008 were not as a result of the usual supply/demand reasoning, but of speculation. Growth seemed to be leveling, and drilling activity had increased. So in hindsight, without disruption of crude, speculation was a likely explanation for a tripling of prices in a very short time.

Instead of using the more traditional hedge funds to drive up prices, a newer mechanism was flourishing… the Sovereign Wealth Funds (SWFs).

 “Since 2005, at least 17 sovereign wealth funds have been created. As other countries grow their currency reserves they will seek greater returns. Their growth has also been skyrocketed by rising commodity prices especially oil & gas, especially between the years of 2003 – 2008.

44% of all SWFs are in the Middle East, and 61% of the funding sources for these SWF’s are oil and gas related. These new power brokers have not only the motive to drive up oil prices, they have the means. According to Dr. Gal Luft, Executive Director of the Institute for the Analysis of Global Security – when testifying before House Committee on Foreign Affairs – they have been pouring billions into Western economies’ hedge funds, private equity funds, real estate and other natural western resources. They were estimated to hold approx $3.5 trillion in western assets at that hearing, and predicted to balloon to $10 to $15 trillion within a decade.

This is an amount equivalent to the entire US GDP.

Contrary to popular political beliefs, oil prices are out of our regulatory control. Instead, they are determined on a global basis, effected through non-transparent trading, and regulated outside the United States borders.

But one US corporation, Intercontinental Exchange (ICE), founded by young entrepreneuer, Jeffrey Sprecher in 2000, has been taking the brunt of Congressional Dems blame, with accusations of oil speculation. Sen. Maria Cantwell, along with Maine’s Olympia Snow, had introduced legislation meant to give the CFTC more authority over the juggernaut that ICE has become since it’s creation. Before that, it was a Feinstein/Levin/Snow bill.

But how much transparency is enough, when it comes to financial terrorist attacks? And is it energy clearing houses, such as ICE, that become unwitting (or witting) accomplices for SWFs putting excess revenues into hedge funds that positively speculate on increased oil prices?

Whalid Phares (pg 22 of the Freeman report), like Freeman, attributed much of the economic crisis to political pressure on Wall Street for risky loans, and Wall’s Streets willing participation in the risk. But Phares also sees a potential 3rd player in crisis – radical elements in OPEC nations…. Crumbling the US economic defense in a matter of months.

The thesis argue that combined Salafist-Wahabi and Muslim Brotherhood circles in the Gulf -with consent from the Iranian side on this particular issue, used the escalating pricing of Oil over the past year to push the financial crisis in the US over the cliff. The ‗high point‘ in this analysis is the timing between the skyrocketing of the prices at the pumps and the widening of the real estate crisis. In short the ―Oil-push‖ put the market out of balance hitting back at Wall Street.

~~~

Let‘s not underestimate the power of the Jihadi-oil lobby in America: it has decades of influence and it has long arms into the system, and it has powerful political allies. It knows when Americans are messing up their own system, and it knows very well how to push them over the cliff, into the abyss of economic calamity.

Jihad doesn’t care about economic destabilization in their backyard. And in fact, would welcome such an opportunity, as we witness with the current uprising in the ME countries. A political and economic vacuum translates to a jihad opportunity. How important is oil as a financial weapon to jihad? (excerpts from pgs 23 and 24 of the Freeman report)

―Sheikh Yussuf al Qardawi, Muslim Brotherhood ideologue and mentor of the Qatari-funded channel, spoke openly of Silah al Naft, i.e, ‗the weapon of oil.‘ Indeed, it was called a weapon – as in a warfare situation — and most likely it was used as such.

~~~

For years now, Salafist web sites and al Qaeda spokespersons have loudly called for an ‗oil Jihad against infidel America and its lackeys.‘ Online material is still circulating. But more revealing are the official speeches by Osama Bin Laden and his deputy on the ‗absolute necessity to use that weapon.‘

Phase 2 – Bear raid runs at the market

The second phase appears to have begun in 2008 with a series of bear raids targeting U.S. financial services firms that appeared to be systemically significant.

Motive of the market, for the most part, is profit. And to accomplish that, sometimes it behooves certain market participants to see a decline in stock values. Bear raids short a target stock… i.e. “borrow” shares in the hopes to cover/replace them with a cheaper price than the current rate. So bad news or rumors are spread to get the stock to drop.

Short selling, a similar process, is legit. But a bear raid is a rapid “short selling” process, involving violations of markets rules by using rumors or manipulation of perceived stock value. It is believed that it was such bear raids, conducted by Jesse “The Boy Plunger” Livermore, that lead to the 1929 US crash, and ushered in the creation of the SEC and the “uptick rule”. – the latter which would limit a short seller‘s ability to drive down a stock price simply from continual selling. Ironically, the uptick rule was eliminated by a Dem held Congress back in July 2007 – a year before the crash, and just months before the oil price run up began. Since 2009, debate and a reintroduction of it’s implementation began, but has not resulted in it’s reinstatement.

But the bear raid assault has been enhanced in sophistication with other more recent, tools. The success of a raid, using Credit Default Swaps, naked shorting*, Exchange Traded Funds (ETFs), and option strategies increases considerably, plus affords appeal with the near impossibility in tracing their origins. Lehman Brothers was also the victim of a bear raid using a combination of these financial tools. (pg 27 of the Freeman study). Dr. Susan Trimbath estimated that failed trades from naked short sales could account for 30-70% of the decline in share values for both Bear Stearns and Lehman. Had the uptick rule, or more transparency for short selling been in place, it’s entirely possible that even the troubled accounting of LB may have been revivable within bankruptcy reorganizing.

Naked short selling occurs when shares are sold without first owning them or borrowing them. This practice is basically illegal with a few exceptions created to promote short-term liquidity. Unfortunately, provisions against naked short selling have had lax enforcement by regulatory authorities in recent years, creating a serious vulnerability in our financial markets.

Just as with Phase 1, where it’s obvious that the conditions did not warrant a run up of oil prices, finding out the How’s, Who’s and Why’s of those at the heart of the bear raids is important… however extremely difficult.

Per the Freeman theory, the “how’s” were obvious. Multiple bear raids were successfully conducted against major US financial institutions. After the collapse of LB, the credit market froze, and stocks collapsed. Amazing when you consider that LB’s collapse may have been averted if there were a restraint on the naked short selling. Thus the economic dominoes began to fall, with the chaos surrounding AIG, GS, Morgan Stanley, losses in Norway’s government pension funds and the Reserve Primary Fund falling below $1 a share for the 1st time in 14 years.

“Who” demands examining who benefited from this chaos? According to Freeman, only net short financial stocks, or the entire market in general. Considering what it would take to organize such chaos across such wide spans and participants, one might discount conspiracy from the overall stock market community, working in concert.

Not withstanding the lack of transparency in these type of illegal trades, most of this trading originated from behind the fronts of brokerage firms, hedge funds and client investor pools.

Regardless of the motive, the actors behind the bear raids not only prefer anonymity but most likely planned for it from the beginning. This suggests layer upon layer of secrecy through foreign shell corporations, feeder funds, and numerous other pass-through entities. Historically, hedge funds have disclosed nothing to the government and very little to the public. Even from a tax standpoint, there has been virtually no ability for governments to track investment results back to most clients.

With the increase of “dark pools” and hedge funds comes anonymity in trading…, which is ideal for the laundering and the use of terror funds as an economic weapon.

One scenario could be that a terror group could direct investments to a feeder hedge fund. That feeder fund would locate a Cayman Islands-based hedge fund on their behalf that was predisposed to sell short financial shares. With sufficient new money, the hedge fund would expand their short selling activity (naked and traditional) and trade through dark pools or with sponsored access.

At the same time, the same terror group might invest heavily in credit default swaps of the targeted short sales either directly, through foreign contacts, or hedge funds. This activity, focused initially on Bear Stearns would prove greatly profitable. The same activity refocused on Lehman Brothers could account for a significant portion of the 33 million failed-to-deliver (naked short) shares, providing the trigger for the market and economy to collapse. And, nearly all of it would occur without notice. In fact, the original investor could close out positions basically undetected.

What this means is that terrorists no longer need to fly buildings into heart of the US financial district. With substantial financial backing, and Internet connection from their caves, they need only set up several overseas hedge funds and, acting as a coordinated unit, dump U.S. stocks…all under the financial radar of virtually all countries.

But for those seeking the quintessential smoking gun, it will be impossible to prove jihad groups were behind the financial crash. As Freeman notes, the only reason to suspect financial terrorism at all is the existence of such unusual trading activity in the scope of the historical norm. Therefore, in order to speculate on the “who’s”, it becomes necessary to review the available trading in the stocks of the financial services firms that appeared subjects of bear raids.

Starting on pg 43 of the Freeman study is the mention of a 65 pg report to Congress, various law enforcement agencies and regulators, titled “Red Flags of Market Manipulation Causing a Collapse of the U.S. Economy”. The report was submitted by an anonymous author.

In this anonymous report, is the key point that there were two companies at the heart of this style of trading, and they consistently work in concert. Freeman deliberately withholds the names of these two companies from his study because “…trading data alone is insufficient to consider any accusations against them.”

Likely for this reason, I have not found this document on the Internet… nor do I suspect any of us will. But it would be an interesting FOIA request to put in. In case any of you find that some enterprising investigative journalist has successfully done so, please provide the links in the comments for the rest of us.

But with the breadcrumbs of clues Freeman left, we can deduce who these companies are *not*, based on the data provided for the anonymous author.

These firms became, virtually overnight, the largest traders in the U.S. financial markets. These companies provide a one-stop-shop for trade execution, back office clearing and bookkeeping that cater to hedge funds and small broker dealers. To give perspective, the amount of trading executed by these two firms in October 2008 exceeded the trading of securities firms Goldman Sachs, JP Morgan and Merrill Lynch combined in the NASDAQ market participant reports.

This obviously leaves out the favored political target of Goldman Sachs, who enjoys the current POTUS on the end of their marionette strings. Whoever these firms are, they dwarf these immense US financial institutions.

But for those who may have a better grasp of the players in the global trading world, here are the other clues from “deep keyboard”, as I’ll call this author:

(From the anonymous report directly)

1) The firms have traded trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value.

2) These firms appear to own few or no shares of blue chip companies they are number one traders in. There is no doubt that the magnitude of their trading impacted the marketplace. Since the direction of the market place has been in a severe downward trend, the impact from the firms has been and remains, negative to the marketplace.

~~~

(From Freeman’s summarized addition key findings)

 The two previously small broker dealers mentioned in the report are market makers for every major financial services firm under attack.
 These firms have a combined 76 different symbols under which they act as market maker (by contrast a major firm such as Citigroup has just 6).
 Both firms offer sponsored access.
 Both firms offer access to dark pools.
 From June through September 2008, the two firms appeared to concentrate on Lehman Brothers, trading 1.04 billion shares while the stock price collapsed from $33.83 to $0.21 on 15 September. This pattern seemed to repeat in every other major financial stock.
 The report estimates that the two firms completed as many as 641,000 trades per hour in October 2008 (based on market participation statistics and average trade size from the last available data).
 Total trading volume by month in the financial sector listed for these two firms grew from approximately 350,000 shares (less than 1% of all market participant trading) in September 2006 to approximately 600,000 shares in the sector (about 6% of all market participant trading) in September 2007, to over 8 billion shares in the sector (about 19% of all market participant trading) by September 2008. That‘s an increase of 2.4 million percent in two years.
 While both firms have been around for several decades, their rapid growth began in 2006 for one and 2007 for the other.
 Both firms seem to specialize in the same stocks at the same time, appearing to work in concert.
 Combined, the two firms traded 203 billion shares, mostly concentrated in major financial services companies. This compares to a total of 427 billion shares outstanding of all issues on the New York Stock Exchange.
 The report estimates trading of at least $5 trillion over the 25-month period ending in November 2008.
 The trading appears to represent new money to the marketplace by new participants.
 From July 2008 through September 2008, the two firms ―traded more shares of Fannie and Freddie than were issued‖ even as the share prices were collapsing.
 The firms were also the largest traders of the UltraShort funds as well as the ―financial spider‖ (symbol ―XLF‖) during the reporting period.
 The firms also became the largest traders of energy stocks.
 The two firms did not and do not hold major equity positions on their books

Whoever they are, they had to have sufficient capital to effect $5 trillion in trades in a very short period… whether domestic or foreign. And they used minor league brokers to focus on failed or failing US financial institutions.

This bring us to the “Why’s”…

Their motive comes down to two base choices… financial for profit, or subversive non-economic motives.

Another favorite target would be George Soros. Certainly the Soros Quantum Fund profited by $1.1 billion during this period. But then Soros was also an outspoken voice, warning of the danger of this bear raid activity. Therefore it’s also entirely possible that Soros, an astute businessman if not a likeable character, merely piggybacked wealth on the events out of his control.

Certainly hedge funds profited as well. Add to that, the naked short selling is a favorite of organized crime and the Russian Mafia. In this case, it will have to be a very greased palm for any of the potential mafias involved.

But then, when you consider greed, coupled with the chaos of the markets, you have to wonder if the quick fast profit, and potential destruction of the largest free market economy, is such a wise strategy. Would a manufacturer make a killing on a new invention right out of the gate, then burn down his factory and the potential to make even more?

Which brings me to those with non-economic motives. Barry Ritholtz, the head of research firm FusionIQ, made an interesting observation on his blog, The Big Picture, on Sept 19th, 2008. Ritholtz was discussing the absurdity of banning all short sales.

I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management. (We used to do schtick together on Power Lunch, and made for an amusing financial comedy team).

But Joe is a good money manager, a great stock picker, and a thoughtful guy. He raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion’s share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

This same financial terrorism theory, plus the date of the economic assault, was noted by Jim Cramer. But in the chaos of the moment, no follow up was done. To pile on to what may not be such a wild theory afterall, add Charles Duelfer and James Rickards in their co-authored NYTs op-ed on Dec 21, 2008, titled Financial Time Bombs.

In their examination of possible suspects, they note that China behaved appropriately during the fiscal crisis, being large holders of US debt. Russia was considered in the bailout of the GSE’s because they are also some of the largest holders of government agency debt. This seems to indicate these two are unlikely perps.

Al Qaeda, on the other hand, has declared that damage to the US economy is it’s 2nd priority, following only mass deaths. To emphasize the jihad focus on the US economy, we need only remember OBL’s words on Dec 21st, 2001.

…hitting the economic structure…is basic for the military power. If their economy is destroyed, they will be busy with their own affairs rather than enslaving the weak peoples. It is very important to concentrate on hitting the US economy through all possible means.”

AQ, acting alone, doesn’t have the financial resources for such an attack. However with their tentacles extending to the cash rich Taliban, Russia, Iran, Venezuela, China and the Arab states, their combined effort may be enough to do the trick. All sects of radical Islam share a common goal – that of replacing “..the ‘slavery’ of the Western international monetary system” with Shariah Compliant Financing (SCF) because it is then subject to Shariah Law.

There are documented ties between the Shariah Finance Compliance and the widely increased appearance of Sovereign Wealth Funds that have appeared on the scene in the past decade. Which again ties into Phase 1’s driving up the price of oil.

Altho there is no evidence that these SWFs have participated in bear raids, the Shariah-compliant SWF now has the ability to sell short either through SCF-compliant hedge funds or directly via the arboon short sale…. and all without transparency.

Yet none of the above bonding between jihad groups eliminates other likely suspects, such as Venezuela, Iran, Russia and China, as they are also abundant in wealthy SWFs. But, as mentioned above, Russia and China have more financial ties economically that would be negatively affected by a damaged US economy.

But renegade Chinese elements may indeed have their motives, and some of the involvement can be traced back to a Chinese individual, helping to launder money thru multiple global banks, aiding in Iran’s WMD program, presumably obtained from Russian sources. Some of Iran’s largest banks are believed to have played roles in illegal money movement.

Another axis of evil, engaging in illegal money movement has been North Korea, who was ID’d as creating and laundry’ing huge sums of counterfeit money.

The report says North Korea uses front companies and shell companies overseas to facilitate the illicit trafficking in supernotes. The use of fake companies increased after the Treasury Department barred U.S. companies from working with Banco Delta Asia.

To further hide the transactions from international financial authorities, the North Korean party office used a financial front company, set up in China in 2006, to make payments as part of the purchases, the report says. North Korea also set up a front company in the British Virgin Islands in the mid-2000s to take advantage of lax banking regulations and tax laws there, it says, and other branches of the front company were established for financial support activities in China, Russia and Southeast Asia.

However what may possibly be the largest indication that financial terrorism is at work is a 2009 story that was virtually swept under the rug by the MSM. The arrest of two Japanese nationals (or Asian men, as reported elsewhere) in Italy, trying to smuggle $134.5 billion in US Treasury bearer bonds into Switzerland. If they were real, it would constitute the largest financial smuggling operation in history. If fake, the quality of the counterfeiting was such high quality to be almost undistinguishable from the original.

At the time, Seeking Alpha pointed out the many strange inconsistencies in the story. Obvious points were their choice of transportation, where two affluent business men would have stood out like sore thumbs on a train filled with Italian common workers, and why the bearer bonds would have been hidden in a secret cache of an attaché case. If they were real, they could have been transported in a diplomatic pouch, exempt from customs scrutiny.

Another eyebrow raiser was the amount of the bearer bonds. The arrest of the Asian men took place early June of 2009. In March, 2009, US Treasury Department announced that USD $134.5 billion remained in TARP funds…, coincidently the same amount of the counterfeit bearer bonds.

This story has more holes than a Swiss cheese. We know from experience here at Notes (your co-editor spent two years working as an investigative reporter in his native Ireland) that there is rarely smoke without fire when it comes to news stories. But one aspect of this story still puzzles us… and it’s a part of the story nobody to date has questioned: What was an obscure Vatican-sponsored news outfit doing breaking the largest financial crime story all time?

As far as we can tell, AsiaNews.it broke the story on June 8. Major news services followed on with their own reports much later. Bloomberg, for instance, only got to it yesterday. So how did AsiaNews.it, a website linked to the Ponticial Institute for Foreign Missions and funded by the Vatican scoop the major news agencies on the bond story?

AsiaNews.it’s About Us page freely admits that it is an anti-Communist organ of the Roman Catholic Church, “nobly dedicated to China and her people.” The organization’s missionary zeal is not difficult to detect.

A smuggling operation of this magnitude demands a level of sophistication that is absent in this attempt in every fashion… from the strategic action to the media outlet who exposed it. It was almost as if they wanted to be caught.

Why? As Seeking Alpha notes, there’s no faster way to sabotage and usher in the death of a currency than to raise legitimate questions about its ability to withstand counterfeiting efforts. (as was done by the Nazis in WWII with Operation Bernhard)

Ironically, the Asian business men, arrested, were released. According to the Italian authorities, they were not caught using the fake bonds in the commission of fraud. Status of the bonds as real or counterfeit did not seem to enter the picture for prosecution.

“The whole thing is a total fraud,” Stephen Meyerhardt, a spokesman for the Treasury Department, said Thursday. “They don’t look anything like real securities, which in any case were never issued in any of those denominations.”

The highest denomination ever issued by the Treasury Department was $10,000, he said. The Italian financial police claimed some of the paper was “Kennedy bonds” from the 1930s, but no such bonds ever existed. And the total of Treasury bearer bonds still outstanding is a mere $105 million; the Treasury has been issuing bonds in electronic form since 1986.

Here’s the rub… the Treasury dept declared their counterfeit status not by in person inspection, but by photos on the Internet. WTF? They appear to be so real as to fool Italian customs, yet can be so easily dismissed by shooting a photo or two thru cyberspace??

On the contrary, again the Vatican’ news arm, AsiaNew.it, linked above, gives reason to doubt the quick dismissal of authenticity.

One more element in favour of the bond’s authenticity is found in the securities, which in the June 4 statement, the GdF termed “Kennedy Bonds” with photos provided. These photos reveal that the securities under discussion are not bonds but Treasury Notes, because they are securities that can be immediately exchanged for their worth in goods or services and because they are devoid of interest coupons. One side carries a reproduction of the image of the American president, the reverse side that of a spaceship. From confidential, usually well-informed sources, AsiaNews has learned that this type of paper money was issued less than ten years ago (in 1998), although it is difficult to know whether those seized in Chiasso are authentic. But the fact that the release of this particular State Treasury was not completely in the public domain tends to exclude the possibility of counterfeiting. It highly unreasonable to suppose that a forger would reproduce a State Treasury not commonly in circulation and of which there is no public knowledge.

As Freeman notes in his report:

The sheer amount of the bonds takes the activity out of the role of the criminal and into the realm of financial terrorism and/or economic warfare.

Again, more questions than answers INRE motive, and players. But it’s obvious that financial terrorism is not a conspiracy theory to be lightly dismissed.

Missy

I much appreciate the time, effort and brilliance we are often treated to and your keeping us informed in matters we would never have a clue of…also the stimulation, good thing I read this in the a.m.. Just wish you could put much of your effort into book form and profit from what you freely give. Thank you Mata, outstanding as usual!

John Galt

Many things worry me about our current situation. It was a good dissection Mata.

The thing that really did push us over the edge was the oil pricing. Many things have costs that either derive directly from oil (gas, plastics, etc.), or have a component associated with oil due to transport, or use of oil based products within their production and go-to-market process.

When oil pushed higher, companies and individuals had to spend a higher fraction of their income and savings on these products, or reduce consumption to keep pricing down.

In the case of individuals, they began to cut discretionary spending. Enough people were in the “barely solvent” class, highly leveraged on mortgages, and could not withstand a serious financial shock.

So in that first wave, people who could stand the change cut back their spending. People who were too highly leveraged, fell off the cliff. Forclosures accelerated beyond the baseline.

But they didn’t start to really accelerate until the recession hit in full force. Then consumers decrease their spending dramatically. Companies that depend upon consumers spending, had to cut their cost basis to whether the storm. So people were laid off.

This is normally a perturbation. A so called first order effect. Think way back to your math days, if you ever took calculus, you learned of this thing called a Taylor series. A first order effect is something small compared to the baseline (zero-th order), but measurable. A perturbation is a change in that first order from where you expect it to be, to where it is.

Most corrections are perturbations. They aren’t real zero-th order effects.

But add up enough of them, and, well, you get a zero-th order effect.

A vicious cycle was launched. Consumer centric companies had to slash costs or die. So they laid people off. And people whom are laid off, seeing a bad job market are going to reign in their spending. Some of them may be able to whether some time off before they lose their houses. Some may not. Which then fed the foreclosure beast. Which reduced consumer spending more as people hunkered down for the hurricane blowing thru the economy.

This perturbation was growing rapidly, and becoming less of a perturbation, and now becoming a zeroth order effect. Wealth was being destroyed with abandon. The government intervened (incorrectly) and “saved” two of the three US large auto manufacturers, in the process, effectively economically devastating south east Michigan, with all these nice companies who will no longer collect the bills they are owed. What choice did they have? Bankruptcy went into high gear here. Housing prices plummeted. Unofficial unemployment stats were closer to 25%. We had people knocking on our door, who lived in our neighborhood, begging for food.

While I find it tremendously distasteful, I understand that we had to intervene temporarily, into the economy to staunch the mad dash towards the cliff. This was largely done at the tail end of GWBs term as president, with momentum carrying it into BHO’s term. TARP this wasn’t, Spendulous this wasn’t. This was the trillion dollar liquidity injections done by the Fed. Without that, as distasteful as it was, we would be in far far worse condition. What happened after that was idiotic, but this one was needed.

Yeah, there were significant problems with mortgages. Yeah, people got them who shouldn’t have. Yeah, there was a massive housing bubble in the US that took advantage of all that cheap and easy money. And yeah, that bubble imploded.

But it would have been a far softer landing had someone not blown up the rest of the pillars of the economy.

[this is metaphorical, so don’t get all crazy over the next bit]
If you want to bring a dam down, you don’t bring enough explosive to turn the dam to rubble. You bring enough to sever support for critical pillars. You then get out of the way, and let gravity do the heavy lifting for you.

Gravity, in this case, was doing the heavy lifting by means of the oil price shock. Start leaning harder and harder, and eventually, you’ll start pushing enough people/companies into failure, that this failure starts a positive feedback.

This is, exactly, what we saw.

Now here’s what troubles me.

Look closely at that oil price plot.

Whats happening to the price of oil? Again?

SPR won’t help here. Only thing that will is a combination of “drill baby drill” with new refineries, with new nuke plants, with conservation and better electrical and other efficiencies. Renewable resources which can cost effectively employed without subsidies … that is … actual, not ideological, solutions, may apply. Resources which, by consuming them, raise other prices (e.g. ethanol), and require huge subsidies, should be stopped/killed outright

James Raider

Only this Administration, led by an individual who doesn’t seem to grasp much of realities outside the wonderfulness of his own image, would think of using strategic reserves.

Strategic reserves are not a stop gap measure against price increases. They are a last resort in the event of major calamities that would impede oil flow – disasters that would stop the Nation from functioning effectively.

Effective leadership would quell the fears, even fears related to foreign revolutions. This President has no such capacity. He has no clue what to say or what to do. Mr. “Present” watches his country suffer from the golf course. Good plan. Good for him.

johngalt

@James Raider

Several years ago, as fuel prices were increasing at the pump, liberals everywhere were crying out for Bush to open up the SPR for domestic use, simply as a way to drop the cost of a gallon of fuel. That kind of myopic thinking concerning economics is what has put us in the mess we are in.

Old Trooper 2

The SPR is not for use by anyone but the Government but opening it up for General Use is foolish beyond comprehension. Libya is still shipping Crude at this time so the point is moot. The Saudis promised to increase production so lets knock off on discussion on the SPR for now, Please.

MaaddMaaxx

A question.

The economic collapse at the end of ’08 was not restricted to the USA, though it may have started here.

Is it possible this was not directed at us specifically but merely as a particularly effective tool?
The piece mentions that though Soros warned of the collapse ahead of time that he still profited by it to the tune of 1.1 Billion during the turmoil.

Could he or other perpetrators have done this with the intent on taking advantage of other companies or countries while weakened similar to what he did in crushing the British Pound in 1992, Thailand and Maylasia in 1997?

I couldn’t find a reference to it but thought there was something similar in Eastern Europe at some point.

This is not to point a finger at Soros but to ask whether the profit could have come in the aftermath rather than as a direct result of an attack?

Serge Kabud

If one decides to extend their knowledge on the issues our government is not really telling us,- here is the top expert from the previous generation of researchers, many times a witness in USA Congress and Senate: Joseph D Douglass Jr.

The world’s financial assets (-equities, -private and government debt and -deposits) rose to $196 trillion in 2007, slightly below the pace of 2006 but still faster than the historical trend-likely marking the recent peak for equity and private debt markets.

World financial assets fell by $16 trillion to $178 trillion in 2008, marking the largest setback on record and a break in the three-decade-long expansion of global capital markets.

The world GDP 60 tril

at the the link above

1999 :
…Three years ago the gross size of international organized crime was estimated by World Bank specialists to be in the neighborhood of $1.2 trillion per year, of which at least $500 billion was profit. This year, a study sponsored by the UN estimated the gross size at $1.6 trillion.

Both of these figures are believed to be low – politically conservative estimates. More realistic estimates run from $2 trillion to $3 trillion. Over 50 percent of that is profit, which means $1 trillion to $1.5 trillion profit each year that is transferred into the coffers of international organized crime. All of this is, of course “laundered” and the bank laundering fee runs from 15 percent to 20 percent, which helps explain their obvious witting involvement. Since the drug trade exploded in the late 1960s in the United States, it is not unreasonable to estimate the total accumulated proceeds in the $30 trillion to $50 trillion range, mind boggling though it may be. Moreover, since this is the profit, it is easy to see how the amount spent on political and police corruption, propaganda, and other influence in important nations can easily have been many billions of dollars each year.

….a U.S. government interagency group conducted a study of international organized crime. Its conclusions were more frightening than the 9-11 attacks.

Just the money-laundering part of international organized crime revenues was estimated to be at least $900 billion, possibly exceeding $2 trillion, a year. Other studies place their gross annual revenues at $2+ trillion.

Drug trafficking, with annual revenues at $500+ billion, is one of the major components of organized crime.

Another component is the sale of illegal goods and arms, most of which go to terrorists and terrorist regimes.

A third component is organized crime’s role as an intermediary in helping terrorist groups and rogue nations acquire weapons of mass destruction.

The money dimension of organized crime, its use for buying favors, corruption and compromise, is probably of greatest concern. Only a few statements from the interagency report, “International Crime Threat Assessment” (December 2000), are needed to tell the story.

“Criminal groups are most successful in corrupting high-level politicians and government officials in countries that are their home base of operations.”

“International criminals are attracted to global finance and trade. They are able to avoid scrutiny because of the importance to businesses and governments of facilitating commercial and financial transactions.”

“Criminal groups cultivate and rely on corrupt political elites, government officials, and law enforcement and security personnel to protect their operations and to provide cover.”
“They use illicit proceeds to: finance political campaigns, buy votes, protect their operations, influence legislation, gain insider access, and pre-empt prosecutions.”

One more. “One of the more significant developments since the end of the Cold War has been the growing involvement of insurgent, paramilitary, and extremist groups.”
In other words, terrorists.

One Big Happy Family

It is not just that terrorism feeds off drug trafficking. Rather, terrorism, drug trafficking and organized crime are one big happy family.

Originally, these were independent operations that emerged in different regions and grew in an evolutionary manner. This is not the nature of these operations today.

This is because in the latter half of the last century, various states (mainly Communist states that were inherently criminal and terrorist in nature) recognized the potential of these operations as revolutionary weapons.

Thus they proceeded to build narcotics trafficking, organized crime and terrorism into major state intelligence operations.

The three operations trafficking, terrorism and crime are different but complementary. They work together while striving to appear independent of each other.

They do not compete with each other, but cooperate synergistically. The three have become so intertwined that war on any one of the three means war on all.

In reality, this is what needs to be done to wage war on all three. They are all unacceptable, they are all covert state intelligence attack operations, each can have dire consequences, and all need to be eradicated.

The most damaging are drug trafficking and organized crime, not terrorism.

Terrorism is the least damaging of the three because its main product is physical damage, in contrast to organized crime and drugs, which attack the moral basis of society and corrupt its leadership and institutions.

However, because of the built-in publicity that goes along with terrorism, it is terrorism that gets the lion’s share of the attention. Witness the U.S. government’s response to the 9-11 attacks.

Actually, far greater damage is done each year by organized crime and drug trafficking in terms of deaths, casualties, corruption and economic costs.

catfish

I can’t remember how I got here but I’m glad I did. I’m still going over everything you have written but I must say that so far you’ve done an excellent job. This was no easy task assembling what you have so far and I thank you for that.

Any idea when your analysis of Phase 3 will be out? Any thoughts on PIMCO dumping all government debt?

Thank you, catfish. Hoping to have Phase Three out by the weekend. Since Phases One and Two are, theoretically, accomplished and/or complete, Phase Three is supposed to be “in progress”… based on The Treasury getting overloaded with debt (check), elimination of the US dollar as the world’s currency (already suggested, but the dollar looks good because the other currencies are also in the tank), and thereby destroying the US economy. Here is where the theory get’s dicey, because the haps around the world change so much on a daily basis. Take, for example, today’s stock market plummet…. China’s surprise trade deficit, Spain’s credit rating decline, US employment figures, Saudi Arabia unrest. And yet, despite the later, oil went down slightly. The gold sell off, however, was big. Caterpillar and Exxon were among the big losers.

Lots to consider when it comes to speculating effect on the US dollar, yes? But yes, I did archive PIMCO’s dumping of US bonds… and thought that was rather prescient when others are starting to run toward US treasuries, hoping for some security. Either way, I think the bull run has pretty much run it’s course. History shows it’s usually about a two year cycle, and ironically, they just celebrated their 2 year anniversay.

buddy larsen

This is a great thread –chock full of excellence!

Mr. Soros often discusses his activities, in an elliptical way if the circumstance demands. He’s got his wizard’s reputation to uphold, because that reputation carefully employed can be entered into trading as a new fundamental –as he himself has said. And he will speak on matters from which he needs the shield of being able to say “But I warned about that very thing” or “I got hurt on that very market move”. He understands that at a certain point in time, warning about bear raids can have no effect on stopping a new round –and that his warning itself will help start some fear-selling. For some reason, the company that drove over the cliff and froze the credit markets, LEH, was attracting a lot of Soros buying in the month or two before its collapse. Heavy buying, he accumulated a significant chunk of the company in August 2008 –take a search, you’ll see. Months after the bankruptcy, Soros published a ”silly me” article (iirc, Financial Times) saying more or less, to the community of crash-stunned financial industry professionals, “Me, too, you guys, I got hurt too!” Pardon me, but, ‘Ha!’.

Anyhoo, that other company besides Dendrion may be Penson Financial. The Deep Capture website has a good article on the Penson connection to the naked shorting –circumstantial, of course –but that’s what makes most cases. A connection to the Genovese crime family (for which Nancy Pelosi’s father is well-known to’ve controlled the Port of Baltimore for Lucky Luciano’s contraband network) is not circumstantial, however.

blert

Thank you buddy and blert for the late visits. Actually, I’ve been working off and on on the Phase II part of the theory. However it seemed useless to post it amid a world, fixated on Japan, nuke power plants, and Libya. Indeed, all of these events actually affect the Phase 3 theory, which resolves around high US debt, devaluation of the dollar, and ultimate replacement of the dollar as the world reserve currency.

In some ways, these are events that are hard for a financial terrorist entity to control since there are mitigating factors that can influence that effect. i.e. Japan’s expensive and tragic tsunami damage. That’s not an event that could be planned, but if Japan decided to liquidate their considerable US assets on the market to finance their way into recovery, it could put a world of hurt on the US dollar and economy. Dumping US Treasury notes and assets is not something we could survive easily.

Nan G

@MataHarley:
Are you going to give any credence to the recent theory that organized labor had something to do with attempts to bring down Wall Street?
Pretty far fetched, but there’s that ex-union leader at Pace college on tape saying it is part of a larger union plan.

Just started reading about the ousted SEIU official a few minutes ago, Nan G. Was busy multitasking, and only just heard about this.

Far fetched? Not necessarily. Especially in the wake of the WI unions sending letters to banks, threatening their boycotts. Ironically, this fits in with his suggested plot, yet was implemented by Locals in WI post his ouster. Did they get rid of the architect, but keep the plans?

In which case, it adds another suspect to the Phase 3 theory, doesn’t it? This would be domestic financial terrorism by the extreme left. There certainly is no dearth of those with power, and political agendas, that run contrary to our founding principles.